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What Your Banker Wants You To Know

What Your Banker Wants You To Know

In small or large businesses, we often end up dealing with banks and bankers beyond the checking account. When you have debt with your bank (your lender), the relationship takes on another dynamic. The typical loan agreement for traditional debt includes loan amount, terms, collateral provided, the covenants you must live by, and the dos and don’ts allowed. When things are going well, the relationship with your banker seems to always go well.  It is in difficult times that things get tough. Let’s look at what your banker wants you to know.

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What Your Banker Wants You To Know

Your banks wants to know the bad new sooner than later. Furthermore, your banker does not want surprises. If you are having issues with your business, then discuss these early on with your banker. If you’re getting close to the limitations of your covenants, then let your banker know. In addition, if you see a change coming in your industry, then let your banker know early on. Be sure to give your banker the good news also. If you are planning on changes to Sr. Management, then mention these to your banker.

The banking world changes based on the economy, regulations, and markets. We remember 2008 when new credit at banking institutions basically shut down. Before that, it was fairly easy to get credit. And loan requirements were not as cumbersome – which is not always good. But the crisis caused a change in behavior at banks – some of it self implemented and some implemented by regulators.

In today’s market, money is still relatively cheap. There is an abundance of liquidity in the markets. So banks do want to loan money, but you must meet some basic guidelines.

What Your Banker Wants You To KnowWhat Commercial Banks Want

In order to loan you money, commercial banks basically want just a few things:

  1. They want to have collateral that secures their loan
  2. They want to know you have the cash flow to payback their loan
  3. They want to understand your business and they want to know what the funds will be used for
  4. They want to understand how much they will make $ on their loan to you

Different Types of Lenders

There are different types of lenders, including the following:

The cost of that capital goes from cheapest to most expensive lender on the list above. The structure of the debt also goes from easiest to most complex structure in the list above. Some want collateral (security), and some do not.

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Keep Your Eye on Your Debt Covenants

Most likely, if you have commercial debt, then you may have some debt covenants stated in your loan agreement. Covenants are the requirements you as the Borrower must maintain to be in good standing with your loan agreement.

Oftentimes, the bank and banker find out something is wrong when you turn in your financials and/or bank compliance certificate. They find that one of the covenants is out of whack. You may have a debt/EBITDA covenant ratio as part of your covenants. This is a common requirement. Do not wait for you to “bust your covenants” before you reach out to your banker. Monitor your covenants closely. If you see drivers in your business that may create a problem with your covenants, then reach out to your banker.

Renegotiate Covenants

Believe it or not, I have been in situations where the loan agreement is already a few years old. The company has become much more financially healthy, and I went back to renegotiate certain covenants to ease the reporting burden. The bank was very open to modifying some covenants. Usually, you have to be in good standing and have a good historical track record to modify or request to modify covenants. But do not be shy. Simply ask. The worst that can happen is your banker says, “no”.

Most bankers in today’s market do really care about the relationship, even at the biggest banks. Your banker does want to see you succeed. If you are living through troublesome times, then your banker does want to see you get financially healthy. But you need to communicate with your banker. The worst thing you could do is hide something from your banker or try to sweep something “under the rug”. That will eventually come, out and you will have burned a bridge with your banker. After you hide something, or if you do not disclose something, your banker will always carry that doubt in the back of his mind. And they may not be there for you when you really need to negotiate that debt covenant.

Are there other areas in your company that you can focus on to improve cash flow (outside of bank loans)? We have put together the 25 Ways to Improve Cash Flow whitepaper to make a big impact today on your cash flow.

 

What Your Banker Wants You To Know
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What Your Banker Wants You To Know

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What Does A Lender Want To Know?

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Required Rate of Return
Venture Capital

What Does A Lender Want To Know?

I had a conversation with a prospect that needed working capital funding. He asked, “What does a lender want to know?” I hear this from every prospect I meet with. So, I gave my normal answer, “We will need personal and business financial statements, a completed application, detailed information on accounts receivable and inventory, and that is just the beginning.” After leaving the prospect, I realized not only did I not answer his question, but also I have never totally answered that question. I now know, the prospect is really asking me what information the lender is looking for so he can get the money.

When I answered this question in the past, I just gave a list of requirements and never explained why they were important to the lending decision process. This information is telling the company’s story to the lender. To start with, think of the financial statement you provide the lender as a score card. In the lender’s mind the more income you make the higher your score. As an example, the more runs a baseball team scores the more powerful the team is.

Tell Your Lender This

So after you tell the lender the score of your company, what else does a lender want to know? You should tell the lender about your company with the following information:

How much money do you want to borrow?

How much money do you want to borrow? The lender needs this information to determine the potential to loan you money.

Why do you want the money and how will it be used?

Why do you want the money and how will it be used? Think of this one as if your child or family member asked to borrow money from you. I believe you would want to know what they were going to do with the money.

What primary source will generate the funds to repay the loan?

Some ways the lender might expect you to repay the loan are; selling a building, producing a product and selling the inventory, or increasing the profits of your business to generate cash flow.

What is the secondary source of repayment?

Amazingly, lenders want to be repaid as you would if you were loaning money. So they consider such things for their repayment as liquidating equipment or injecting additional capital from personal funds.

How will the loan be secured?

How will the loan be secured (collateral)? The lender wants a security interest in whatever you are going to do with the money.

Who will guarantee the loan?

Who will guarantee the loan? From the lender’s point of view, you must be 100% sure of your ability to repay the loan. And, you must be willing to put your personal assets on the line. Otherwise, they would be risking their job by making a potentially bad loan.

The better you tell your story the better your chances are of getting the money.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

lender want to know
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lender want to know

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What Lenders Look At?

See Also:
Relationship With Your Lender
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Finding the Right Lender

What Lenders Look At?

I recently spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, I was asked by a student, what lenders look at when they are deciding whether or not to approve a loan.

I answered the question by saying all lenders start with looking at the C’s of credit. There are normally five Cs of credit which I will define in a minute. But, the really important issue in getting your transaction approved rests upon your ability to present your case in satisfying each of the C’s.


Download The 25 Ways to Improve Cash Flow


5 Cs of Credit

Depending upon your lender, the weight assigned to each “C” may vary, so you must understand the order of importance to the specific lender you are dealing with.

Character

The first C is Character. Normally borrowers don’t consider this but, lenders do. Lenders look at such things as your willingness to pay obligations, morality, and integrity. Lenders determine the borrower’s business character based on the historical information. To form an opinion on character, lenders will review the borrowers past success, payment history, and intangibles such as personal credit, family background and employment records.

Capacity

Another C is the borrower’s Capacity to pay. The lender normally looks to the business and determines if the business has a history of successful operations. The lender will determine if the business has paid their debts when they were due and shown a proven ability to generate cash flow. If you are trying to fund a start up, you must show prior business experience relating to the operation of the business you are trying to start. You must provide evidence of the capability of operating successfully and paying your bills.

Capital

Next, lenders look at another C Capital. Capital is the equity or net worth of a company. Capital signifies the company’s financial strength as a credit risk. The more capital a company has, the smaller the credit risk. Your company needs a history showing increasing sales, profits and net worth. Additionally, your company needs favorable trends in your operations, such as, constant or increasing gross profit margins.

Conditions

Another of the C’s is Conditions. Lenders will analyze how current and expected economic situations may affect your business. Such items might include past and current political history, and business cycles for you and who you sell to. Normally, the lenders like industries that are in periods of dynamic growth.

Collateral

The final C is Collateral. Lenders will determine the company’s ability to access and provide additional resources such as, equity or other assets, to use for repayment if the company’s capacity or character fails.

By addressing these C’s in your business plan and on your loan application you make the lender’s job faster and easier. Therefore, understanding and selling your C’s will improve your chances of getting the lender to approve your request.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

what lenders look at
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what lenders look at

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Venture Capital

See Also:
Every Business Has A Funding Source, Few Have A Lender
Don’t Tell Your Lender Everything
Due Diligence on Lenders
The Relationship With Your Lender
What Does A Lender Want To Know?

Venture Capital Definition

The Venture Capital definition is a funding source for start-up businesses or turnaround businesses. There is typically more risk associated with these types of investments, but high returns as well.

Venture Capital Meaning

The Venture Capital meaning is when a lender, usually a private equity group or high net worth individuals, provides financing for a new business, a business that needs cash for growth, or a company attempting to make a turnaround. Associated with these different business needs are the different stages of venture capital.

Seeding Stage

The first stage for the companies that are just starting up is known as the seeding stage.

Growth Stage

The next stage is the growth stage for those businesses that are not quite ready for an Initial Public Offering (IPO), but are in need of some financing to get them to that point. Often times venture capital firms provide the funding for these companies knowing that they are high risk. However, these lenders usually earn a high return as these companies go public. This is because the lenders receive large compensation in the form of equity in the company or a large cash settlement. If a company is in a turnaround stage this is the highest risk of venture capital.

Exit Stage

The exit strategy in this stage often go for a much higher cash option or equity stake than even the first and second stages of company development. This type of capital is often necessary because the companies in need of this financing are not large enough to obtain the capital from the markets in the quantity needed.

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venture capital, Venture Capital Definition, Venture Capital Meaning

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venture capital, Venture Capital Definition, Venture Capital Meaning

 

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Secured Claim

See Also:
Pledged Collateral
Collateralized Debt Obligations
Debt Ratio Analysis
Debt Service Coverage Ratio (DSCR)
Convertible Debt Instrument
Asset Based Financing

Secured Claim Definition

The secured claim definition is debt backed by collateral. It can refer to loans, mortgages, bonds, and other financial debt instruments.

As stipulated in the debt contract, the debtor backs the debt with assets that the creditor may claim in the event of default. In a secured claim contract, if the debtor defaults, or is unable to payback the debt, the creditor can take ownership of the collateral and sell it to pay off what the debtor owes. For example, if a consumer defaults on a mortgage, the bank can claim the house and sell it to pay off the consumer’s debt. In the event of default, the secured claim is worth only as much as the collateral that backs it.

In contrast, unsecured claims are debt contracts or instruments not backed by collateral. Secured claims are considered less risky. In addition, these contracts or instruments offer lower yields. In comparison, unsecured claims are more risky. These contracts or instruments offer higher yields to compensate the lender (or investor) for the higher risk.

secured claim

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Time To Find A New Lender?

See Also:
External Sources of Cash
Other People’s Money
Due Diligence on Lenders
Don’t Tell Your Lender Everything
Finding The Right Lender

Is It Time To Find A New Lender?

I was meeting with a business adviser last week named John and he asked me “When do you think it is in the best interest for a company to find a new lender?”

Determine Location On Lender’s Food Chain

I told John the first thing a company must determine is where they are located on the food chain of the lender. It may be hard to believe, but some lenders may not want their business. If the company does not realize the lender’s feelings and chooses to stay, the lender will take their business (money) until they realize they are being over charged and leave.

John then said “What you are saying is the lenders may not value some business.” I said that is right, and as you know, companies normally deal with a lender that makes the process faster and or easier. I then asked John “How many of your clients have done any due diligences to determine if the lender is going to help them meet their personal or business goals?” He looked a little funny and said “None that I know of.”

I said that is normally the case. When your client is talking to the lender, they need to determine if the lender is really listening. In some, if not in most situations, the lender is listening, but not about your needs. The lender may be listening for selling signals to seize upon the opportunity to offer you some product or service you really don’t need or want.

Fee Income

Lenders have diversified their services and are very interested in fee income. Fee income is defined as the income a lender receives without taking any risk. Checking account maintenance fees, loan closing fees, ATM fees, etc., meet this definition. Your client’s business may need some, if not all of the services offered, but is the lender asking questions about the company’s needs, or just selling their services?

Your clients should realize that lenders do not have their best interest in mind. Lenders are in business to make money, just like your clients. I have had lenders tell me they do not want to offer solutions that would reduce costs to their customers because they would loose their fee income and reduce their profits.

Your clients must remember to make sure the lender is listening and understanding their needs. Additionally, your clients should understand, the best lender may not be the fastest and easiest to deal with.

find a new lender

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Relationship With Your Lender

See Also:
What do Lenders Really Look at
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Every Business Has a Funding Source, Few Have a Lender

Relationship With Your Lender

The question I get most often from people is “What affects my relationship with my lender the most?”

Communication

The answer is communication. Communication or lack there of is the greatest area of weakness between entrepreneurs and their lenders. When news is bad, entrepreneurs tend to shut down communication thinking the lender will be upset. The entrepreneur needs to understand that the lender may be concerned, and their reactions will be far less negative than if they are told nothing. Just as in your personal relationship, nothing upsets your partner more than surprises. The same is true with your lender.

Changing Jobs

Don’t blame yourself totally, because not all the weaknesses in this lending relationship rest with the entrepreneur. Lenders change jobs more frequently than politicians change their minds. As a result of these jobs changes, many lenders are unfamiliar with their customers, and become wary of extending credit even when the business deserves the credit.

Relationships Are Challenging

Relationships, whether personal or business, are always challenging. But in order for the entrepreneur to survive, an environment must be created that is conducive to fostering a productive, long-lasting relationship with your lender. Clear, frequent, open lines of communication are the most necessary component of a strong entrepreneur-lender relationship. Business owners and lenders should talk at least quarterly. And, when things are changing rapidly in the business, they may need to be talking weekly.

Invite Your Banker Inside

Lenders will always require financial statements and the frequency will depend on the type of loan. However, the entrepreneur has to realize there is more involved in communication than mailing out financial statements. Invite the lender to tour you facilities, but don’t extend the invitation just before you need their money, as that will create suspicion. Communicate with your lender when something important happens, such as gaining a major account. Be sure to put your comments in writing. This provides your lender with documentation should questions arise.

Conclusion

And remember, a lending relationship is identical to any relationship, because it is based on trust. Therefore, a lending relationship is the same as your personal relationship, in that it needs to be nurtured day in and day out, not once a year. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

relationship with your lender

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